SINGAPORE, Feb 19 — The Goods and Services Tax (GST) will be raised by 2 percentage points to 9 per cent sometime between 2021 and 2025, said Finance Minister Heng Swee Keat today.
The exact timing of the hike – which has been widely anticipated in recent weeks in the lead-up to Budget 2018 – depends on “the state of the economy, how much our expenditures grow, and how buoyant our existing taxes are”, said Heng. “But I expect that we will need to do so earlier rather than later in the period.”
“This GST increase is necessary because even after exploring various options to manage our future expenditures through prudent spending, saving and borrowing for infrastructure, there is still a gap,” he said.
The impending GST hike will provide a revenue boost of almost 0.7 per cent of the gross domestic product (GDP) each year, which “will be vital” in closing the gap, Heng said. “We will continue to manage our expenditures and the need for other future revenue measures carefully, and plan ahead early for our overall revenue and expenditure needs,” he reiterated.
First introduced in April 1994, the GST was raised from 3 per cent to 4 per cent in 2003, and then to 5 per cent in 2004. The last hike was in 2007, when it was raised to 7 per cent. Similar to past GST hikes,
Heng said the increase will be done in a “progressive manner”.
He stressed that the Government will continue to absorb GST on publicly-subsidised education and healthcare. When the GST increase kicks in, the permanent GST voucher (GSTV) scheme — introduced in 2012 — will be enhanced to cushion the impact for lower-income households and seniors, he added.
The Government disburses about S$800 million annually from the GSTV Fund. This year, the fund will be topped up by S$2 billion to support GST voucher handouts.
There will also be an offset package to help lower- and middle-income households to tide over the GST increase, said Heng. More details of the package will be provided after the timing of the hike has been determined, he added.
Reserves ‘important for long-term stability’
Heng acknowledged that a “natural question” in response to a GST hike is why the Government was not looking to tap more on the country’s reserves instead.
He pointed out that this has, in fact, been done over the last decade. Recent changes to the NIR framework allowed the Government to spend up to half of the long-term expected real returns from the assets managed by GIC, the Monetary Authority of Singapore and Temasek Holdings.
The changes took effect in financial year 2016, and since then, the Net Investment Returns Contribution (NIRC) has overtaken corporate tax to become the largest single contributor to the Government’s coffers.
The NIRC is projected to make up about 15.9 per cent of the operating revenue for the financial year ending March 31 next year, while the GST and personal income tax is expected to constitute 11.4 per cent each. Meanwhile, corporate income tax is set to contribute 15.1 per cent to the revenue.
Since the NIR framework was introduced in 2008, the NIRC will more than double from S$7 billion in FY2009, to an estimated S$15.8 billion for FY2018.
“We are able to supplement our revenues with the NIRC today because our predecessors judiciously set aside the savings from the strong growth during Singapore’s earlier stage of economic development,” said Heng.
With Singapore facing a maturing economy and ageing population, it is important to “husband this resource carefully, prudently and responsibly”, he stressed.
Noting that the other half of the expected NIR is kept in the reserves so that it can grow in tandem with Singapore’s economy, Heng said that if the NIR is fully spent by the Government of the day, the principal sum of the reserves will “stagnate over time”. As a result, the NIRC as a share of the GDP will fall as the country’s economy grow.
This is not a “trivial” matter given that Singapore’s Budget relies on the NIRC as its largest source of revenue, Heng reiterated.
“In a more extreme scenario, if we spent more than our investment returns, we will eat into our nest egg,” he said. “Doing so would mean that our reserves will shrink over time, generating a progressively smaller stream of income in the years that follow, till eventually our reserves are exhausted.”
Pointing out that this is not the “Singapore way”, Heng reiterated that Singapore does not have any natural resources, and its reserves have contributed to the long-term stability of its economy.
The reserves have also afforded the country the means to weather crises, said Heng as he cited examples such as the 1997 Asian financial crisis and the 2008 financial crisis.
In 2009, the Government had to tap on past reserves for the first time, drawing a total of S$4.9 billion to introduce measures including the Jobs Credit Scheme and the Special Risk-Sharing Initiative to cushion the impact of the recession on workers and businesses.
Noting that Singapore will always be vulnerable to fluctuations in the global economy and financial markets, Heng said: “We can never predict where or when the next crisis will come. But we know, when the next crisis hits, we will be able to weather the storm because we have our reserves. — TODAY
Source: The Malay Mail Online